The Relationship between ESG Scores and Firm-Specific Risk of Eurozone Banks

Abstract

This paper investigates the relationship between corporate social responsibility and the idiosyncratic risk of Eurozone banks. Idiosyncratic risk represents firm-specific risks for banks, and the Carhart four-factor model is used for 31 Eurozone banks from 2002 to 2019 to determine the idiosyncratic risk. Thomson Reuters ESG scores are used to determine the ESG scores of these banks during the same period, and the effects of the environmental, social, and governance dimensions are investigated separately. The quantile regression method reveals a relationship between ESG and idiosyncratic risk over different risk levels. A significant negative relationship has been found between the overall ESG scores and the idiosyncratic risk of banks for medium- to high-risk levels. The effect becomes stronger as the riskiness of the banks increases. Similar to the overall ESG score, the governance and environmental dimensions have a negative impact on banks with medium- to high-risk levels. No significant relationship could be identified between the social dimension and the idiosyncratic risk of banks.

Social Sustainability in European Banks: A Machine Learning Approach Using Interval-Based Composite Indicators

“…Fair workforce treatment, product responsibility, and equal treatment of shareholders are the most significant variables (Chiaramonte et al, 2021). Finally, idiosyncratic bank risk: differently from the Environmental and Governance dimension, there is no significant association (Izcan & Bektas, 2022).…”

“…While the literature on the effects of ESG values in generic companies is pervasive, there are fewer contributions focused on the banking world. The most debated arguments are financial-accounting and market performance, efficiency, and reputation (see, for instance, Izcan & Bektas, 2022;La Torre et al, 2021;Neitzert & Petras, 2021;Ahmad et al, 2021;Birindelli & Intonti, 2018;Brogi & Lagasio, 2018a;Dell'Atti et al, 2017).…”

“…The social aspect of ESG directly impacts reputation. The social variable has an influence on positive community engagement, product responsibility and good employee relations (Izcan & Bektas, 2022). Therefore, employee relations form an essential part of the social dimension, and previous research has concluded that good employment practices and policies minimize firm-specific risks (Lopez-Penabad et al, 2022).…”

“…The literature on the effects of Environmental, Social, and Governance (ESG) on accounting performance (La Torre et al, 2021;Ahmad et al, 2021;Brogi & Lagasio, 2018a), market performance (Di Tommaso & Thornton, 2020;Buallay, 2019;Miralles-Quiros et al, 2019 ), risk and efficiency (Izcan & Bektas, 2022;Neitzert & Petras, 2021;Forgione et al, 2020) in the banking system is deep, while fewer contributions are about ESG index (Bhimavarapu et al, 2022;Chang et al, 2021;Papoutsi & Sodhi, 2020). This research aims to fill this gap, focusing on the social component.…”

What do we know about ESG and risk? A systematic and bibliometric review

“…At the aggregate CSP level, many studies highlight a negative association between CSP and the company's total risk, showing that the environmental performance decreases the idiosyncratic risk, whereas it has a negative effect on systematic risk only in sensitive industries. (see e.g., Eriandani and Wijaya (2021), Sassen et al (2016), Izcan and Bektas (2022)).…”